Davies’ “Extreme Economies” – Part 2: Failure

In the previous part of this three-part review, I looked at Davies’ first subsection (“Survival”) where he ventured to some of the most secluded and extreme places of the world – a maximum security prison, a refugee camp, a tsunami disaster – and found thriving markets. Not in that pejorative and predatory way markets are usually denounced by their opponents, but in a cooperative, resilient and fascinating way.

In this second part, subtitled “The Economics of Lost Potential”, Davies brings us on a journey of extreme places where markets did not deliver this desirable escape from exceptionally restrictive circumstances.

There might be many reasons for why Extreme Economies has become a widely read and praised book. Beyond the vivid characters and fascinating environments described by Davies, this swinging between opposing perspectives is certainly one. Whether your priors are to oppose markets or to favour them, there is something here for you. Davies isn’t “judgy” or “preachy” and the story comes off as more balanced because of it.

If the previous section showed how markets flourish and solve problems even under the most strained conditions, this section shows how they don’t.

Darien, Panama

We first venture to the Darien Gap, the 160-kilometre dense rainforest that separates the northern and southern sections of the Pan-American Highway – an otherwise unbroken road from Alaska to the southern tip of Argentina.

To a student of financial history, “Darien” brings up William Paterson’s miserable Company of Scotland scheme in the 1690s; trying to make Scotland great (again?), the scheme raised a large share of scarce Scottish capital and spectacularly squandered it on trying to build a colony halfway around the world. In the first chapter of subsection ‘Failure’, Davies skilfully recounts the Darien Disaster, “Scotland’s greatest economic catastrophe” (p. 114).

Judging from Davies’ ventures into the jungle bordering Panama and Colombia, it wouldn’t be a far cry to call the present state of affairs a similar economic catastrophe. Rather than failed colonies, the failed potential of Darien lies elsewhere: its environmental challenges coupled with the trade and markets that failed to emerge despite readily available mutual gains for trade.

A stunning landscape of mile after mile filled with rainforests and rivers and the occasional lush farmland, the people of the Gap make a living through extracting what the land provides. If you’re deep into environmentalism, you might even say unsustainably so. Davies’ point is to illustrate a more well-known economic problem: when unowned or communally owned resources suffer from the tragedy of the commons – the tendency is for such resources to be overexploited and ultimately destroyed.

Whether through logging companies exceeding their quotas or locals chopping trees out of desperation to survive, the story in Darien is altogether conventional. At the edge of the Gap, “the people of Yaviza do what they can. [T]he environment is an asset, and for many people living in Yaviza getting by is only possible by chipping a bit off a selling it” (p. 120).

What’s striking here is that in times of need (as Davies himself showed in the chapter on Aceh) that’s exactly what we want assets to do! We can show this in down-to-earth, real-world examples like Acehnese women drawing on their jewellery as emergency savings, or in formal economic models such as the C-CAPM, the Consumption Capital Asset Pricing Model, familiar to every business and finance student.

On a much cruder level: if the mere survival of some of the poorest people on earth depend on chopping down precious trees – well, precious to far-away Westerners, anyway – accusing those people of destroying our shared environment is mind-blowingly daft. To rationalise that equation, you have to put a very large value on turtles and trees, and a very small value on human life.

Elinor Ostrom, whose Nobel Prize in economics was awarded to her work on common pool resources, emphasised three ways to solve tragedies of the commons: clear boundaries (i.e. individual property rights); regular communal meetings such that members can voice opinions and amicably resolve conflicts; a stable population so that reputation matters and we can socially police deviant behaviour (p. 125).

The Darien Gap has none of those. Property rights are routinely ignored; the forest includes many different populations (indigenous tribes, farmers, ex-FARC fugitives, illegal immigrants); and those populations fluctuate a lot, meaning that most interactions are one-shot games where reputation becomes useless. End result: extensive, illegal, unsustainable logging mixed with armed strangers.

What I can’t quite wrap my head around is that almost all (market and non-market) interactions that all of us have daily are with strangers: the barista, the people we walk past on the street, the new client you just met or the customer support agent you just talked to. All of them are strangers. A large share of interactions with other humans in the last few centuries of human societies have been one-offs, yet very few of them have spiral into the lawlessness that Davies describes in Darien. Be it the Leviathan, secure property rights, the doux commerce thesis or some wider institutional or cultural reason, but the failure of Darien to establish well-functioning formal and informal markets of the kind we saw in the book’s first part are intriguing.

While a fascinating chapter, it might also be Davies’ worst chapter, factually speaking. He claims, mistakenly, that “globally, deforestation continues apace with 2016 the worst year on record for tree loss”. On the contrary, we’re approaching global zero net deforestation. More specifically, Davies claims that Colombia and Panama are particularly at risk here, with rates deforestation “increased sharply”. A quick look through UN’s Global Forest Resource Assessment report (latest figures from 2015), these two countries are indeed chopping down their forests – but by less than any other time period on record.  Moreover, the Colombian net deforestation rate of 0.05% per year is easily exceeded by a number of countries; not even Panama’s dismal 0.3%/year (worse than the Brazilian Amazon) is particularly high in a global or historical perspective.

To make matters worse, the figure on p. 158 titled “The World’s Disappearing Tropics” might win an award for the most misleading graph of the year: by making the bars cumulative and downplaying the annual deforestation, it suggests that the forests are rapidly disappearing. The only comparison to relevant numbers (remember, Rosling teaches us to Always Be Comparing Our Numbers) is the tired “football pitches”. That’s hugely misleading. A vast amount of football pitches cleared in the Amazon this year still only amounted to 0.2% of the Brazilian Amazon; in other words, Brazilians could keep chopping down trees for a few good decades without making much of a dent to that vast rainforest.

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Moreover, the only reference point we’re given is that over a period of almost twenty years, an area the size of France has been deforested – but that’s equivalent to no more than one-tenth of only the Amazon forest, and the tropics have many more forested areas than that. The graph aims to intimidate us with ever-rising bars signalling the loss of forests; with some proper numbers and further examination it doesn’t seem very bad at all. On the contrary, locals (and yes, international logging companies) use the assets that nature has endowed them with – what’s so wrong with that?

Finally, the “missing market” that Davies observes in the Gap involves countless of illegal immigrants from around the world that trek through the jungles in search of a better life in the U.S. We have cash-rich Indians, willing to pay people to guide them through unknown and dangerous terrain, and local tribes and farmers and ex-FARC members with such knowledge looking for income; setting up a trade between them ought to be elementary.

Instead, it’s not: “in this place of flux,” writes Davies, “reputation does not matter, interactions are one-offs” (p. 137). Overturning the market quip that “trading is cheaper than raiding”, in the Darien Gap raiding is cheaper than trading. One might of course object that the failures of rich countries to offer more liberal immigration rules for people willing to go this far to get there illegally is hardly a market failure – but a failure of government regulation and incompetent bureaucracies.

Kinshasa, Democratic Republic of the Congo (DRC)

A 12-million people city sprawled on the banks of the Congo river, so unknown to Westerners that most of us couldn’t place it on a map. Democratic Republic of the Congo, the country with more people in extreme poverty than any other, is frequently described as “rich”. Or, with Davies’ euphemism “unrivalled potential” (p. 143).

Congo, the argument goes, has “diamonds, tin and other rare metals, the world’s second-largest rainforest and a river whose flow is second only to the Amazon. [it] shares a time zone with Paris [and the] population is young and growing”. It is one of the poorest countries but “should be one of the richest” (p. 143).

No, no and no. Before any other consideration of the remarkable day-to-day trading and corruption that Davies’ interview subjects describe, this mistaken idea about wealth must be straightened out. Wealth isn’t what could be if this or that major obstacle wasn’t in the way (Am I secretly a great singer, if I could only overcome the pesky fact that I have a voice unsuited for singing and lack practice?). This is almost tautological; what we mean by a country being poor is that it cannot overcome obstacles to wealth.

All wealth has to be created; humanity’s default position is extreme poverty.

And natural resources do not equate to wealth – there is even more support suggesting the opposite – in which case Japan and Singapore ought to be poor and Venezuela and DRC rich. My own sassy musings are still largely correct:

As Mises taught us half a century ago – and Julian Simon more recently – wealth (or even ‘goods’ or ‘commodities’ or ‘services’) are not the physical existence of those objects somewhere in the ground, but the satisfaction and valuation derived by the human mind. The object itself is only a means to whatever end the actor has in mind. Therefore, a “resource” is not the physical oil in the ground or the tons of iron ore in the Australian outback, but the ability of Human Imagination and Ingenuity to use those for his or her goals. After all, before humans learned to harnish the beautiful power of oil into heat, combustion engines and industrial production, it was nothing but a slimy, goe-y liquid in the ground, annoying our farmers. Nothing about its physical appearance changed over the centuries, but the mental abilities and industrial knowledge of human beings to use it for our purposes did.

Still, “modern Kinshasa is a disaster everyone should know about” (p. 172). No country has done worse in terms of GDP/capita since the 1960s. And we don’t have to go far to figure out at least part of the reason: the first rule of Kinshasa, says one of Davies’ interviewees, is corruption (p. 145). Everyone “steals a little for themselves as the funds pass through their hands, and if you pay in at the bottom of the pyramid there are hundreds of low-level tax officials competing to claim your cash.” (p. 185). Mobutu, the country’s long-time dictator, apparently said “if you want to steal, steal a little in a nice way” (p. 159).

Whether small stallholders at gigantic market or supermarket-owning tycoons, workers or university professors, pop-up sellers or police officers, everyone in Kinshasa uses every opportunity they can to extract a little rent for themselves – out of desperation more than malice. And everyone hates it: “The Kinoise”, writes Davies, “understand that these things should not happen, but recognize that their city’s economy demands a more flexible moral code.” (p. 168).

Interestingly enough, DMC is not a country whose state capacity is insufficient; it’s not a “failed state”, an “absent or passive” government whose cities are filled with “decaying official buildings and unfilled civil-service positions.” (p. 148). On the contrary:

The government thrives, with boulevards lined with the offices of countless ministries thronged by thousands of functionaries at knocking-off time. The Congolese state is active but parasitic, a corruption superstructure that often works directly against the interests of its people.

Poorly-paid police officers set up arbitrary roadblocks and extract bribes. Teachers demand a little something before allowing their pupils to pass. Restaurant owners serve their best food to their civil service regulators, free of charge, to even stay in business. Consequently, despite an incredibly resilient and innovative populace, “these innovative strategies are ultimately economic distortion reflecting time spent inventing ways to avoid tax collectors, rather than driving passengers or selling to customers” (p. 162).

But, like the ingenious monetary system of Louisiana prisons, the most fascinating aspect of Kinshasa’s economy is its use of money. Arbitrage traders head across the river to Brazaville in neighbouring Republic of the Congo equipped with dollars which they swap for CFAthe currency of six central African countries, successfully pegged to the euro. With ‘cefa’ they buy goods at Brazaville prices, goods they bring back over the river and undercut exorbitant Kinshasa prices. Selling in volatile and unstable Congolese francs carries risk, so Kinshasa’s streets are littered with currency traders offering dollars – at bid-ask spreads of less than 2%, comparing favourably with well-established Western currency markets. Before most transactions, Kinoise stop by an exchange trader sitting outside restaurants or malls, to acquire some Congolese francs with which to pay. Almost, almost dollarisation.

In Kinshasa, people rely on illegal trading as a safety net when personal disaster strikes or the state’s required bribes become too extortionary. Davies’ point is a convincing one, that “a town, city or country can get stuck in a rut and stay there” (p. 174).

Judging from his venture into Kinshasa, it’s difficult to blame markets for that. I don’t believe I’m invoking a No True Scotsman fallacies by saying that a market whose participants spent half their time avoiding public officials and the other half bribing them to avoid arbitrarily made-up rules, is pretty far from a free market.

Believing the opposite is also silly – that markets and mutual gains from trade can overcome any obstacles placed before them. Governments, culture or institutions have power to completely eradicate the beneficial outcomes of markets – Kinshasa’s extreme poverty attests to that.

Glasgow, the last part of ‘Failure’, is discussed in a separate post.

Davies’ “Extreme Economies” – Part 1: Survival

Late to the party, I relied on the quality-control of the masses before I plunged into Richard Davies’ much-hyped book Extreme Economies: Survival, Failure and Future – Lessons from the World’s Limits (see reviews by Diane Coyle and Philip Aldrick). I first heard about it on some Summer Reading List – or perhaps Financial Times’ shortlist for best books of 2019. What really prompted me to read it, however, was an unlikely source: The Guardian’s long-read in late-August. Davies adopted his Louisiana Prison chapter and described the intricate ways prisoners and guards in maximum-security prison Louisiana State Penitentiary (“Angola”) exchange value using the top-up debit card Green Dot and single-use MoneyPak cards. I was hooked.

Davies’ captivating and personal writing in that 4000-word piece made me want to read the full thing. Once I got around to it, I couldn’t put it down – which is the best compliment an author can get. At little over 400 pages of easy non-jargon prose, it doesn’t take too long to get through – and the nine case-study chapters can easily be read on their own. Further attesting to the brilliance of the book are the many questions it raised with me, insights to investigate further.

The book’s structure is simple to follow: three themes ‘Survival’ (“The Economics of Resilience”), ‘Failure’ (“The Economics of Lost Potential”) and ‘Future’ (“The Economics of Tomorrow”), each containing three fascinating places, wrapped between an introductory and a concluding chapter.

The motivation for the book is a mixture of John Maynard Keynes and a Scottish 19th century civil engineer named David Kirkaldy. The latter’s big idea was studying “why materials buckled and bent under pressure” (p. 31); to fully grasp the potential for something, we need to examine why they fall apart. From Keynes Davies took the idea that the future is already partly here:

“We can get a glimpse of the future today, if we know where to look. The trick was to identify a sustained trend – a path most people are following – and look at the lives of those experiencing the extremes of that trend. […] to zoom forward in time, he said, we need to find those whose lives are like this already.” (p. 31)

Davies ventures to nine places of the world, all extreme in some aspect, and investigates the everyday economic challenges that people face and the ingenious ways in which they do – or do not – solve them. By carefully looking at the present, he posits to gauge something about the future.

In this first part – ‘Survival’ – I look at Davies’ three selections (Aceh, Indonesia; Zaatari, Jordan; and Louisiana, U.S.). The next part contains the case studies of ‘Failure’ (Darien, Panama; Kinshasa, DRC; Glasgow, Scotland) and the concluding part looks at ‘Future’ (Akita, Japan; Tallinn, Estonia; and Santiago, Chile). As I have personal experience of living in two of these places while knowing virtually nothing about many of the others, I reserve some complementary reflections on Glasgow and Santiago when appropriate.

Aceh, Indonesia

On Dec 26, 2004, an Indian Ocean earthquake created a tsunami that devastated coastlines from Thailand to Madagascar. Two-thirds of the 230,000 human lives lost were in Indonesia, mostly in the Aceh province on the northern tip of Sumatra, closest to the earthquake’s epicentre. Pictures taken before and after show how complete the destruction was; except for a few sturdy mosques, nothing was left standing.

A few years later, the busy streets and crowded beaches were pretty much back to normal. How?

Davies’ story does not emphasise aid flows or new investment by outsiders, but “informal systems of trade, exchange and even currency” (p. 49), an aspect that generally “goes unmeasured an unassessed” (p. 65). Aceh’s catastrophe is a story of human resilience and of intangibles.

The people Davies interviewed told him how the ancient Aceh practice of keeping savings in wearable and portable gold – necklace, rings, bangles – provided survivors who had lost everything with a source of funds to draw on. Importantly, a gold dealer told him, as the market price of gold is set internationally, the massive sell orders coming in simultaneously did not affect prices very much. Additionally, the dealer’s knowledge of market prices and contacts in Jakarta allowed him to quickly set up his business again. Buying Acehnese’s gold during those crucial months, way before foreign aid or government could effectively respond, provided people with funds to rebuild their lives. Traditional practices “insulated Aceh and provided its entrepreneurs with rapid access to cash” (p. 49).

Another insightful observation is the role played by intangibles – the knowledge of how and where and when that most of our economies depend on. Sanusi, 52-year-old coffee trader, lost everything: his shop, his equipment, his family. Amid his devastation he realized that one thing that the tsunami had not destroyed was his knowledge of the coffee business – where to source the best beans, how to make it, where and when to sell the coffee. He patched together some spare planks, used his business contacts to provide him with trade credit and had his rudimentary coffee business set-up in time for the arrival of coffee-drinking construction and aid-agency workers.

Davies also gives us a very balanced GDP discussion here, as the years after the December 2004 disaster saw huge GDP growth. Most economists would reflexively object and invoke Bastiat’s Broken Window Fallacy. Yes, Davies is well aware, but he’s getting at something more subtle:

“GDP aims to capture what a country’s residents are doing now, rather than what they have done previously. [It is] all about current human activities – spending, wages, income, producing goods – rather than the value embodied in physical assets such as building and factories. Far from being a mean or cold measure, economists’ favourite yardstick is a fundamentally human one.” (p. 53, 65)

To GDP, what you produced in the past is of no consequence. Clearly, when the tsunami devastated the coastline of Aceh, killing hundreds of thousands of people in the process and wiping away houses, factories and equipment, that made everyone poorer – their assets and savings and capital were literally washed away. Considering the massive construction boom that followed, only partly financed by outside aid and government money, it is not incorrect to say that GDP boomed; it is only incorrect to believe that people were made better off because of the disaster. Bastiat teaches us that they were not.

I think of this as the difference between your total savings (in cash, stocks, bank accounts, houses, jewelry) and your monthly income, a difference between “stock” and “flow”. If, like many Acehnese that Davies interviewed, your earnings-potential depend on your knowledge of your industry, your most valuable assets remain untouched even after a complete disaster. Your savings – your capital, your stuff – are completely eradicated, but the basis for your future income remains intact. With some minor equipment – a trade credit, some furniture, a shop patched together with flotsam – you can quickly approach the production and income you had before. GDP attempts to measure that income – not the current value of total assets.

“The people here,” Davies concludes, “lost every physical asset but the tsunami survivors retained skills and knowledge from before the disaster, and rebuilt quickly as a result.” (p. 66).

Zaatari, Jordan

Following the Syrian civil war and its exodus of refugees, camps were set up in many neighbouring countries. Often run by the UN, these camps ensure minimum survivability and life-support for refugees and are rather centrally-planned; the UNHCR hands out blankets, assigns tents and provides in-kind goods and services (food, medicine etc).

In April 2013, the Zaatari camp in the northern Jordan desert had grown to over 200,000 inhabitants, with daily inflows of up to 4,000 refugees. It was too much – and the UNHCR “ran out of manpower” (p. 70). They rationalised operations, focused on their core tasks – and left individuals alone to trade, construct and flourish on their own. It became a lesson in anarchic cooperation and of the essentiality of markets – and, like the Louisiana prison economy below, an ingenious monetary system.  It “did not happen by design, but by accident”, Davies writes, and constitutes “an economic puzzle worth unpicking” (p. 72) only if you doubt the beneficial consequences of markets and free people. If you don’t, the result is predictable.

Every month, the Zaatari camp administrators load up payment cards for the refugees with 20 dinars (£23) per person, spendable only in the two camp supermarkets. Designed to be a cashless economy, the money flowed directly from donors to the supermarkets: “refugees cannot transfer cash between wallets, so aid money designated for food cannot be spent on clothes, and the winter clothing allowance cannot be spent on food” (p. 79).

This extreme and artificial economy teaches us something universal about markets; imposed orders, out of touch with market participants’ demands, malfunctions and create huge wastes. Complete monetary control by outsiders, Davies writes, “fails the basic test of any well-functioning market – to be a place where demand meets supply” (pp. 80-81). Supermarkets lacked the things refugees wanted, and they stocked up on things that reflected kickbacks to donor countries (Italian spaghetti or Brazilian coffee), entirely out of sync with Syrian cuisine and preferences. And the unorganic, artificially-set prices were entirely detached from the outside world.

Yet, the refugee city of Zaatari is a flourishing economy where people build, make and trade all kinds of things. How did this happen? Innovative Syrians found a way around their monetary restrictions: the economy of Zaatari “rests on the conversion of homes to business and flipping aid credit, via smuggling, into hard cash” (p. 88). Informal and free markets, at their best.

Along most of the camp’s boundaries, there are no fences, only roads – and the huge number of children playing ball games on the concrete roads or running in and out of the camp, makes identifying who’s a refugee and who’s a teenage smuggler next to impossible. What the refugees did was:

  • buy some item in the supermarket using the e-card credits provided by UNHCR
  • sell it to smugglers for less than their outside market value and obtain hard cash in return
  • smugglers slip out of the camp and sell the goods to Jordanians and other driving past, taking a cut for themselves.

Bottom line: refugees turned 20 dinars of illiquid and restricted e-credit into hard cash, spendable on anything anywhere in the camp. The productive powers of 200,000 refugees was unleashed. In Zaatari, the presence of smugglers allowed large-scale interactions with the outside world – and so the artificially-created closed-loop payment system did not remain closed. Instead, it was connected to the outside Jordanian economy through smuggling!

The take-away point is to cherish market activities, even informal ones, since they “matter to everyone and are fundamentally human” (p. 102). Governments plan and creates problems; markets solve them.

Louisiana State Prison

Analogous to the Zaatari refugees, prisoners in Louisiana’s maximum-security prison (“Angola”) find themselves in a similar economic squeeze: unsatisfied demand and large shortage of goods, artificial constraints on what prisoners can and cannot own. Prisons are places where official prices don’t work: paltry “incomes” through mandatory work stand in no relation to the officially-mandated prices of goods that prisoners can buy at commissary. Accusations of modern slavery comes to mind. The “official price system,” Davies writes, “has been intentionally broken” (p. 119).

To escape their formal and restricted economy, prisoners have long relied on smuggling. Radford’s famous article about cigarettes becoming money in a WWII Prisoners-of-War camp applied – until Angola officials decided to ban tobacco from the premises. Cash too risky to hold; age-old money banned. What now? Fintech to the rescue!

Louisiana prisons “have a remarkable new currency innovation, something far better than tobacco or cans of mackerel”. Physical dollar bills are not handled, bank accounts that leave digital traces are not linked to individuals: “people pay each other with dots”, says an ex-convict that Davies interviewed (p. 132).

Contrary to the belief that smuggling into prisons happen through corrupt prison guards only, prisoners have some power; they can stage riots or make guards’ everyday-life very hard by misbehaving in every imaginable way. That power gives prisoners and guards alike incentives to trade with another – but prisoners don’t have anything to offer, apart from occasional or indivisible services like car repairs or (like Andy Dufresne in the movie Shawshank Redemption) accounting services. And paying guards in commissary products is not gonna cut it.

Here’s how Angola prisoners solved their monetary constraints, obtaining means of payment to smuggle in items their economy’s participants demanded:

  • set up an account with Green Dot, providing a pre-paid debit card without requirements of ID or proof of address.
  • buy a second card, a single-use scratch card called MoneyPak, used to load the first card with anywhere between $20 and $500. These cards are usable anywhere that accepts VISA and Mastercards, and easily bought/cashed out at Walmarts or pharmacies.
  • Scratch away MoneyPak’s 14-digit number (“the dots”), and transfer those digits to somebody else, be it another prisoner or guard.
  • that person goes online, logs into their Green Dot account, enters the combination and credit is added to their debit card.

The dots, Davies describes, “are a currency close to cash: an instant, simple and safe transfer of value over long distance” (p. 134). Even prison economies, argues Davies, “show that the human urge to trade and exchange information is impossible to repress” (p. 136).

The Economics of Resilience

The power of informal economies are great – and essential to people cut off from regular economic processes. Through natural disasters, in refugee camps or in prisons, innovative people find ways around their imposed-upon constraints and “establish a trading system if theirs is damaged, destroyed or limited in some way”. (p. 135)

Aceh, Zaatari and the Angola prison show “three places where markets, currencies, trade and exchange exist despite all odds.” (p. 139).

Markets for Secrets?

In a world without intellectual property, would it be possible to buy and sell secrets? I suggest the answer is yes. In this post, I provide both a theoretical framework for such markets, as well as pointing to real life examples of such markets already existing.

Introduction

In a previous post, we talked about why information is the only public good. But of course, it’s possible to keep information private. Such private information is called a secret. Currently, entrepreneurs and inventors have two choices when they have what they believe is a profitable secret: they can either keep recipe, industrial process, or so on, a secret, and be protected by “trade secret” laws; or they can “publicize” their secret in exchange for a patent (which they can use to either issue injunctions against competitors or to extract royalties).

But there has been a lot of economics literature in recent years that challenges the status of intellectual property (IP). Most famously, there is Michele Boldrin and David K. Levine’s book Against Intellectual Monopoly, where they detail both an empirical and theoretical case against the economics of intellectual property. Furthermore, patent lawyer Stephan Kinsella’s book Against Intellectual Property gives a principled legal and ethical case against IP.

Continue reading

Path Dependency and the Republican Party

Let’s apply path dependency to the plight of the national Republican Party and see where it takes us:

Writing in Fortune in the run-up to the 1962 congressional elections, Max Ways asked, “Is Republicanism a Losing Cause?” Arguing at the height of JFK’s popularity that there was nothing wrong with the party’s two main convictions, namely that individual liberty is best served by a strong, yet limited, federal government, and that “market capitalism is a beneficent force in the world,” Ways insisted that Republicans would never “reinvigorate their party so long as they let the Democrats set the terms of battle.”

After a drubbing in the 1964 election, the party was able to set the terms of battle as America’s cities burned and the war in Vietnam headlined the evening news. In Ronald Reagan, the party’s reinvigoration was complete. His ability to communicate the party’s convictions and win elections suggested that Republican dominance of the White House might be sustained. It wasn’t. But even in the aftermath of defeat, in 1992, the party could take solace in Bill Clinton’s declaration that the era of Big Government was over. Perhaps the party had truly won the battle of ideas.

But now the Republican Party has come full circle, and is again in crisis, having suffered defeat in the popular vote in five of the past six presidential elections. As was the case in 1962, there is no end to prescriptions for saving the GOP. To the accumulating heap of advice, I add this to the pile: Consider path dependency before formulating policy, conducting politics, and making appeals to voters.

California’s Republican Governor Arnold Schwarzenegger famously promised to “blow up” the boxes of a bloated government in Sacramento—and then not much happened. At the national level, Republicans have been promising to repeal, dissolve, and defund laws, agencies, and programs since the 1930s, with little overall success, notwithstanding the odd victory here and there. The yearning to begin anew may be alluring, but there ain’t no going back.

In rhetoric, Republican Party leaders still call for ratcheting back Leviathan, at least on the economic front. Yet, just as Governor Schwarzenegger did, they falter when it comes to actually blowing up the boxes of government. Republicans make poor revolutionaries. At the same time, they seem to have eschewed democratic politics as a means to their ends. Perhaps, in their view, playing politics would constitute an exercise in making “socialism” more efficient, in which they allegedly hold no interest. But by failing to reconcile ideas and ideals with path dependent history, the party is becoming ever more out of touch.

Gaining an appreciation for path dependency may help the party connect with voters: a prerequisite to articulating effectively a vision of a political economy based on individual liberty, limited government, and market capitalism. After all, if no one is listening, it doesn’t really matter what you might be saying.

Another problem: It’s rather difficult to figure out what the Republican Party stands for these days. Since the 1980s, its calls for racheting back Big Government have been long on promising a return to some ideal state and short on mapping a pragmatic path toward reining in the actually existing state. Interestingly, the rhetoric heats up when the party is out of power, casting doubt on the sincerity of those spouting it. When they have occupied the Oval Office, Republicans have had no less a penchant increasing the size and scope of government than the Democrats they accuse of being enthusiasts for socialism. The Bush administration used the crisis of 9/11 to increase government surveillance of private citizens and expand Washington’s interventions overseas. The crisis of the Great Recession served as occasion to bail out Wall Street. Indeed, in economic terms, Republicanism has come full circle, not from the free soil, free labor, and free men days of Lincoln, but from the Gilded Age. Where the rubber hits the road, that is, in terms of implementation, there is little evidence that the Republican Party holds individual liberty, limited government, and market capitalism as core convictions. But let’s stipulate, for the sake of this post, that Republicanism at its core remains grounded in the two main convictions identified by Mr. Ways.

So how might a consideration of path dependency help to right the listing Republican ship?

In a previous post, I applauded Daron Acemoglu and James A. Robinson for their effective deployment of path dependency in Why Nations Fail: The Origins of Power, Prosperity, and PovertyThey showed that “critical junctures” that disrupt the existing political and economic balance in society launch nations down their respective dependent paths. And once embarked on a dependent path, the weight of history makes it extremely difficult for a nation to change course.

In America, as Robert Higgs has shown, two world wars, with a great depression sandwiched in between, constituted the critical junctures—or critical episodes, as he calls them—that resulted in an immense expansion in the scale and scope of the U.S. government. With the passage of time, the American people have accepted most aspects of Leviathan—especially when it comes to social insurance—as the norm. In Higg’s view, there is no going back because the federal government’s responses to successive crises engendered a sea shift in ideology among the people. Writing in 1987, Higgs doubted that the Reagan Revolution would live up to its billing. And he was spot on.

For an intraparty conversation on the appropriate scale and scope of government to be productive and persuasive, it ought to begin with coming to terms with the state as it “really is” and reflecting on how it came to be (including the many contributions of all postwar Republican administrations to expanding said state).

Take Social Security. Opposed on the Right, it was passed in a form that didn’t please the Left. But over the years, Social Security expanded in scope and size under Democratic and Republican administrations alike. It’s now been around for more than 75 years. Talk of entitlement reform as Baby Boomers age, at least in terms of assessing, funding, and perhaps adjusting future liabilities? Absolutely. But apocalyptic talk of Social Security’s impending bankruptcy as prelude to overhauling this mainstay of middle-class entitlements surely has lost more votes than it has gained. And to what end? Leaving aside the question of individual liberty, replacing mandated contributions to a government plan with mandated contributions to private ones introduces risk for which future retirees seemingly have no appetite. Path dependency does not mean that all doors to reform are shut for all time. But Republicans have little hope of blowing up this box.

So, what to do? First, acquire a deep appreciation for the path dependencies embedded in America’s laws, regulations, policies, and political institutions. Use the exercise to identify potentially winning issues that align with core convictions, as stipulated. Then embrace the democratic process as a platform from which to win hearts and minds and accomplish realistic goals.

Markets Strengthen Moral Values

[Cross-posted at the Progress Report]

Pure markets enhance people’s moral values. In a pure market economy, all activity is voluntary for everyone, and involuntary acts, those which coercively harm others, are outside the market as an invasion of rights. A pure market includes the governance that enforces natural moral law, thereby promoting acts that are good or neutral, while minimizing evil acts.

Critics of markets have claimed that when people search for the cheapest goods, this reduces moral concerns. But in a pure market, the products offered are produced by moral means, i.e. by a process that does not involve coercive harm. Therefore searching for the lowest-cost goods is not evil. Only when goods are produced by immoral means, such as with slave labor, is the product morally bad, but that could not occur within a pure market.

Unfortunately, some economists who conduct research on human behavior leap to incorrect conclusions because while they have been trained in experimental techniques and mathematics, their graduate-school training did not include market ethics. For example, Prof. Dr. Armin Falk at the University of Bonn and Prof. Dr. Nora Szech at the University of Bamberg conducted experiments in which persons were offered a choice between receiving ten euros versus letting a laboratory mouse get killed. If a subject decided to save a mouse, the experimenters bought the animal (“Morals and Markets”), allowing it to live a decent life. Continue reading

Around the Web

1. Stanford’s online encyclopedia of philosophy has a new entry on ‘markets’.

2. Why the Swedes are moving to Norway.

3. John Stossel explains why Washington DC is the richest area in the US:

Lobbyists and taxpayer-funded special privilege won’t go away unless big government does.

4. BRICS planning to build their own development bank. Does this signal the end of the West’s 400-year period of dominance? No. If anything, this is a triumph of the ideal of the West and especially its thinkers’ critiques of central economic planning.

5. The Sectarian Social Democratic Ideal. A very, very good critique of social democracy.